Legal Talk - The Licensing of Financial Service Providers

It will be found that, in most material respects, the licensing requirements of financial service providers under the Financial Advisory and Intermediary Services Act [FAIS] and those of estate agents as prescribed by the Estate Agency Affairs Act, are, as can probably be anticipated, fairly consistent for two service orientated professions that are regulated in the public interest.

The Licensing of Financial Service Providers

FAIS imposes definite requirements upon the work roles and functions within the financial services industry. Financial service providers must be licensed with the Registrar before they may legally operate in this role. Entities and individuals must moreover, meet certain licensing requirements and are obliged, in addition, to comply with a code of conduct before obtaining, and thereafter retaining, their licenses. FAIS also imposes definite requirements pertaining to education and experience before financial service providers may give advice on the various categories of financial products and obligations.

The appointment of a ‘key individual’

Financial services providers are required to appoint at least one natural person to act as a ‘key individual. A financial service provider may be a brokerage or financial product supplier acting as a sole proprietor, a partnership, a close corporation, a business trust or a private or public company while the key individual is responsible for overseeing the process of providing advice or intermediary services to clients in respect of financial products. The key individual, who may be a director, the head of a business unit or a manager who oversees or manages any activity relating to the rendering of any financial service, must be named and registered with the Financial Services Board in such capacity.

The distinction between natural and juristic persons

It is important, when applying to be licensed as a financial service provider, to distinguish between a ‘natural person’ and a ‘juristic person’ since this differentiation affects the assigning of responsibility for actions that are undertaken by the financial service provider. Natural persons are, in this respect, distinguished from juristic persons such as companies, close corporations and trusts which are recognised as separate legal entities existing apart from their members and from the natural persons which form part of the legal entity concerned. While a juristic person necessarily acts through natural persons, it is the juristic person which acquires rights and/or incurs duties and not those natural persons in their personal capacities.

A definition of ‘representative’

FAIS requires, furthermore, that any employee rendering financial advice be registered and licensed with the Financial Services Board.

“Representative” means’ any person:

Who renders a financial service to a client;

For or on behalf of a financial services provider;

Acting in terms of conditions of employment or any other mandatory agreement; but

Excluding a person who renders clerical, technical, administrative, legal, accounting or other services in a subsidiary or subordinate capacity; and which clerical, technical, administrative, legal, accounting or other service does not require judgment on the part of that person or does not lead a client to conclude any specific transaction in respect of a financial product in response to general enquiries.

Required levels of competency: the ‘fit and proper person’ test

For registration as a representative of key individual of a FSP certain minimum levels of competency must be in place. Advisors must, moreover, meet the ‘fit and proper” requirements contained in FAIS which are linked to the type and category of the particular financial product. A financial service provider must exhibit the personal character qualities of honesty and integrity, must comply with competency and experience requirements, have attained minimum academic standards and/or qualifications, demonstrate operational ability and financial soundness and satisfy prescribed continuing professional development (or continuing education) requirements. As financial products become increasingly complex so too will advisers be required to become increasingly proficient in terms of their levels of competency.

The appointment of a compliance officer

Financial service providers having more than one key individual or representative are also required to appoint a compliance officer. FAIS recognises the appointment of both internal and external compliance officers. The compliance officer, thus, can:

Either be an internal appointment; or

That the compliance function can be outsourced.

Compliance officers must be registered and licensed with the Financial Services Board to function as such and have specific FAIS obligations that must be met including responsibility for monitoring of statutory compliance within the financial service provider and for statutory reporting to the Financial Services Board.

Acting as a representative

A person may not act as a representative of an authorised financial services provider unless that person is able to provide confirmation to clients, as certified by the Financial Services Board, that:

A service contract or other mandatory agreement to represent the financial services provider has been concluded; and

The financial services provider accepts responsibility for the activities of the representative falling within the service contract or other mandatory agreement, as the case may be.

The responsibility of financial service providers

In terms of FAIS:

A financial services provider is both liable for the conduct of its representatives and takes responsibility for its employees of representatives; and a representative engages in the same activities as its principal, for and on behalf of the financial services provider that it represents. This relationship is a financial services provider or that the representative has received a mandate from the financial services provider. The financial services provider is, furthermore, required to maintain an up-to-date register of its representatives with the Financial Services Board.

The application to be licensed

To be licensed as a financial services provider the applicant must submit an application to the Registrar in the form and manner determined by the Registrar. The application must be accompanied by the information necessary to satisfy the Registrar that the applicant complies with the fit and proper person requirements for financial services providers as indicated above. The Registrar will grant the application for a licence to a financial services provider once satisfied that the applicant complies with the FATS requirements failing which the Registrar will refuse the application. When an application is approved the Registrar issues a licence to the applicant authorising the applicant to act as a financial services provider.

The obligations of the licensed financial services provider

The licensed financial services provider is required to:

Display a certified copy of the licence in a prominent and durable manner within every business premises of the licencee;

Ensure that a reference to the fact that such a licence is held is contained in all business documentation, advertisements and other promotional material; and ensure that the licence is at all times immediately, or within a reasonable time, available for production to any person requesting proof of licensed status under authority of a law or for the purpose of entering into a business relationship with the licencee.

The retention of the licence

To retain the licence, a financial services provider is required to be compliant in various ways, including:

Maintaining a register of representatives;

Keeping the Registrar in Formed of all changes to its profile as registered with the Financial Services Board;

Taking reasonable steps to ensure that its representatives comply with the applicable codes of conduct, as well as other laws related to the way in which business must be conducted;

Being satisfied at all times that its representatives meet the requisite “fit and proper” person requirements in terms of competency, honesty, integrity and operational and financial soundness; Maintaining proper accounting records with regard to the business carried on by the financial services provider which records must be audited by the financial services provider’s external auditor and approved by the Registrar;

Reporting to the Financial Services Board in an annual compliance report; and

Maintaining records concerning transactions and complaints for a minimum period of five years.

The licence of a financial services provider may be suspended if that financial services provider no longer meets the requirements for the issue of the licence. The licence may also be withdrawn under the circumstances listed in section 10 of FAIS.

Courtesy: Agent – The Official Publication of the Estate Agency Affairs Board

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